How To Buy Short-Sale Properties
Weak housing markets create new golden opportunities for property investors. One classic opportunity is a "short sale," so-called because the owner has agreed to sell the property for less than he or she owes on the first and possibly second mortgages. The seller usually intends to leave the lender "short" on the sale, and that's why the lender's approval is required for such sales to close.
Here are some tips for investors who want to purchase short-sale properties:
Get to know the sellers. A successful short sale typically is predicated on the seller's financial hardship, which is the impetus for the lender's approval of the deal. Savvy buyers look for sellers who are behind on one or more of their mortgage payments and who aren't in a strong enough financial position to catch up the payments they've missed. If the seller is financially solvent and has other resources to make the mortgage payments, the lender is unlikely to accept a short payoff from the sale of the home. A second or third lien on the property also can be a plus for the investor since a lender who is in an inferior position may be more willing to negotiate a deal.
Get to know the property. Investors oftentimes find the best bargains among properties that are in need of major or many repairs. The poor condition of the property may signal the seller's financial hardship and inability to handle the costs of owning and maintaining the home. Smart investors document the necessary repairs with descriptions and pictures, obtain contractors' estimates, if possible, and share that information with the lender.
Get the lender's go-ahead. Some lenders are willing to accommodate short sales in certain circumstances while others turn a deaf ear to all such propositions. Investors who are able to connect with lenders' asset management and loss mitigation departments may be better positioned to discover which lenders will cooperate and which won't. An uncooperative lender spells doom for a short sale. Also, don't assume that because a lender accepts a short payoff on a property in one area that the same lender will accept a short payoff on another property in a different area as well.
Get financing lined up early. Conventional lenders may be reluctant to finance an investor's purchase of a short-sale property that's in poor condition. That means the investor should expect to pay cash or arrange a line of credit or other financing ahead of time. Refinancing may be an option once the short sale has closed and the property has been repaired. The investor also should expect to pay most or all of the closing costs on both sides of the transaction since short sellers typically aren't able to bring money into the deal or walk away with money when the deal closes.
Get comfortable with the deal. Regardless of the condition of the property or the seller's personal hardship, successful investors know every deal still needs to make sense as an investment. Prudent investors walk away from properties that can't be purchased for a low enough price to ensure an upside even if the seller is desperate and the lender is willing to play ball. Be sure to figure the effect of any unpaid property taxes or other liens against the property into the deal as well.
Copyright 2007. Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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